Upgrading without formal integration in M&A: The role of social integration

• Published date: 01 August 2020
• Author: Rui Torres de Oliveira,Sandra Figueira,Sreevas Sahasranamam,Justin Paul
• Date: 01 August 2020
• DOI: http://doi.org/10.1002/gsj.1358

RESEARCH ARTICLE

Upgrading without formal integration in M&A:

The role of social integration

Rui Torres de Oliveira

1

| Sreevas Sahasranamam

2

|

Sandra Figueira

3

| Justin Paul

4

1

International Business, Queensland University of Technology, Australian Center for Entrepreneurship Research, Business

School, Brisbane, Queensland, Australia

2

Strathclyde Business School, University of Strathclyde, Business School, Glasgow, UK

3

Strategy and Entrepreneurship, University of Queensland, Business School, Brisbane, Queensland, Australia

4

International Business, University of Puerto Rico, Business School, San Juan, Puerto Rico

Correspondence

Rui Torres de Oliveira, Queensland

University of Technology, Australian

Center for Entrepreneurship Research,

Business School, Brisbane, Qld, Australia.

Email: rui.torresdeoliveira@qut.edu.au

Abstract

Research summary:By adopting a pheno menon-based

research approach, we examine the case of an emerging

market (EM) supplier upgrading its position in the automo-

tive global value chain (GVC) through the acquisition of a

technologically advanced firm from a developed market

(DM). Drawing on GVC and social integration literature,

we explore the role of social integration adopted by the EM

acquirer to achieve upgrading through acquisition. We

develop a conceptual framework where we explain the dif-

ferent social integration mechanisms that EM multinationals

employ before and after acquisitions to achieve upgrading.

Managerial summary:When analyzing an EM firm

acquiring a DM firm we found that social integration is a key

factor that enables knowledge transfer, particularly if no formal

or structural integration occurs. This suggests that the develop-

ment of mechanisms to facilitate strong socially integrated rela-

tionships with acquired firms is central for such type of

acquisitions. Our research shows that EM firm managers need

to put in place combinations of social integration mechanisms

during different phases of the acquisition. Environmental and

cognitive social integration mechanisms are crucial for gaining

initial legitimacy. Furthermore, affective social integration is

Received: 16 June 2018 Revised: 22 August 2019 Accepted: 23 August 2019

DOI: 10.1002/gsj.1358

Global Strategy Journal. 2020;10:619–652. wileyonlinelibrary.com/journal/gsj © 2019 Strategic Management Society 619

important for initiating process and functional upgrading, while

cognitive social integration mechanisms become important for

initiating intersectorial upgrading.

KEYWORDS

emerging market, global value chains, mergers and acquisitions, social

integration, upgrading

1|INTRODUCTION

There has been a continuous increase in knowledge-seeking foreign direct investment from emerging

market (EM) multinational enterprises (EMNEs) into developed markets (DMs) (UNCTAD, 2016)

as a strategy for upgrading from low-value to high-value capabilities and activities (Gereffi, 1999;

Mudambi, 2008). Upgrading has been a key element of the global value chain (GVC) literature and

has been identified as a key factor influencing increased profits for EMNEs (Herrigel, Wittke, &

Voskamp, 2013; Kumaraswamy, Mudambi, Saranga, & Tripathy, 2012). Despite increased

knowledge-seeking foreign direct investment by EMNEs into DMs and its relevance to upgrading,

questions remain around how this happens if the entry mode is acquisitions (Hansen, Fold, &

Hansen, 2016; He, Khan, & Shenkar, 2018), and there exists only a light-touch integration (Y. Liu &

Woywode, 2013) or no formal integration (Torres de Oliveira & Rottig, 2018) between the firms,

which is different from integration approaches adopted by developed market multinational enter-

prises (DMNEs) (Cartwright & Schoenberg, 2006). As such, we ask the question: “How can an

emerging market firm upgrade through an acquisition of a developed market firm without formal

integration?”

Despite the growing international presence of EMNEs, limited attention has been given to their

GVC upgrading and underlying knowledge flows (Cano-Kollmann, Cantwell, Hannigan,

Mudambi, & Song, 2016; Cuervo-Cazurra & Rui, 2017; He et al., 2018; King, Slotegraaf, & Kesner,

2008). This is a significant omission, as knowledge flows within EMNEs that acquire DM firms may

be fundamentally different from knowledge flows within DMNEs having subsidiaries in emerging or

other EMs. In both instances, the underlying assumption is that internationalization to DMs entails

gaining superior knowledge capabilities (Luo & Tung, 2007) and thus would have a knowledge flow

direction from the most competent (DM) to the less competent (EM). However, differences in the

organizational context in terms of ownership, internal capabilities, and location of headquarters

(in EMs rather than DMs) are likely to have an impact on how this knowledge flow and upgrading

happens (Awate, Larsen, & Mudambi, 2015; Deng, 2009). Deng (2009), for example, found that

EMNEs tend to acquire strategic assets in international expansion, proposing a model of resource-

driven motivation for overseas acquisitions by these firms. However, how the focal firm transforms

the resources acquired remains a black box. This should not be surprising, since an international

acquisition of a DMNE as a strategy for upgrading by EMNEs is still a rare phenomenon that is very

much understudied (Hansen et al., 2016; He et al., 2018). Such acquisitions for upgrading come with

associated challenges, for example culture differences (Hansen et al., 2016), liability of emerging ness

(Madhok & Keyhani, 2012), weakness in technical expertise (Awate, Larsen, & Mudambi, 2012;

Lebedev, Peng, Xie, & Stevens, 2015), difficulties of absorptive capacity (Cohen & Levinthal, 1990;

Zahra & George, 2002), and lower managerial capabilities (Ramamurti, 2012).

620 TORRES DE OLIVEIRA ET AL.

Given these different capabilities and challenges that happen in an EMNE–DMNE cross-border

acquisition, coupled with intention of the firms to upgrade, past research has recognized that a poten-

tial way to untangle such constraints is through interorganizational relationships (Björkman, Stahl, &

Vaara, 2007). Not surprisingly, recent research (Cuervo-Cazurra & Rui, 2017; Hansen et al., 2016;

He et al., 2018) has called for more attention to explore the role of interorganization relationships in

EMNE upgrading. With similar reasoning, we decided to look at the social integration literature

(Briel, Schneider, & Lowry, 2019; Cohen & Bailey, 1997; O'Reilly, Caldwell, & Barnett, 1989; Van

der Vegt, 2002) as it does not imply a formal integration but, and at the same time, might function as

the integration mechanism that supports focal firms to upgrade.

In the case of EMNEs, social integration becomes crucial for multiple reasons. First, prior

research notes the prominence of social mechanisms, such as guanxi in the case of China, to bridge

the barriers associated with institutional voids and to overcome the EMNE's lack of legitimacy in the

eyes of the DMNE (Chatterjee & Sahasranamam, 2018; Park & Luo, 2001). Second, as acknowl-

edged earlier (Kumaraswamy et al., 2012; Luo & Tung, 2007), there is a significant gap in the techni-

cal expertise of EMNEs in comparison to DMNEs. In order to overcome this knowledge gap, social

integration mechanisms are considered important (Enkel, Groemminger, & Heil, 2018). Third,

EMNE–DMNE relationships involve significant cultural differences, which increase the complexity

of the linkage (Grøgaard & Colman, 2016; Hansen et al., 2016). For instance, culture studies have

extensively discussed (e.g., Paul & Shrivatava, 2016) the differences in the role of national culture in

interorganizational relationships. It is recognized that social integration mechanisms are particularly

effective to glue together such culturally differentiated interorganizational relationships (Clark &

Geppert, 2011). Despite the importance of social integration mechanisms, limited research has gone

into exploring their role in interorganizational relationships and the knowledge transfer that occurs

within the EMNE–DMNE relationship. Therefore, it is important to explore in greater depth the

social integration mechanisms that EMNEs employ in order to achieve upgrading.

We use two complementary literature streams to explore this research gap. We utilize the GVC

literature (Gereffi, 1999, 2005; Sturgeon, Van Biesebroeck, & Gereffi, 2008) to ground the closely

consolidated nature of the automotive GVC and highlight the associated barriers to becoming a lead

supplier. We also use the GVC literature to discuss different types of upgrading and their relevance

for EM firms. Second, we used the social integration literature (Briel et al., 2019; Cohen & Bailey,

1997; O'Reilly et al., 1989; Van der Vegt, 2002) as the potential explanation for overcoming the lack

of formal integration aiding EMNEs to achieve upgrading through acquisitions.

In order to examine the social integration mechanisms, we utilize the case of a recent Chinese

acquisition (EMNE) of a German firm (DMNE). Before the acquisition, both firms' revenues were

much lower than after the acquisition, thus indicating the effectiveness of the acquisition and

upgrading mechanisms. Our results demonstrate that multiple types of social integration mechanisms,

namely environmental, affective, cognitive, and behavioral (Briel et al., 2019), were put in place

between the two firms, which ensured different types of upgrading and the effectiveness achieved by

the Chinese firm.

This paper makes multiple contributions. First, we add to the GVC and upgrading literature by

combining it with social integration literature to develop a conceptual framework that explains the

different social integration mechanisms that EMNEs employ before and after acquisitions to achieve

upgrading. Though this, we also extend the social integration literature by highlighting the relevance

of different social integration mechanisms in upgrading by EMNEs during preacquisition and

postacquisition phases. Thus, we respond to calls for future research to understand the process

aspects of interorganization integration in the EMNE–DMNE relationship (Cuervo-Cazurra & Rui,

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